Reed Smith insurance attorneys Amy Koss, Stephen Raptis and Anthony Crawford survey the unique risk landscape facing data center owners and operators. Because no off-the-shelf “data center policy” yet exists, the trio explores how traditional coverages – property, cyber, technology E&O, and general liability – can be layered to safeguard both the bricks-and-mortar infrastructure and the critical information coursing through it. If you build, host, or rely on data centers, this episode is your blueprint for intelligent risk transfer. This is latest episode in our Data Center series. ----more---- Transcript: Hello: Hello and welcome to Insured Success, a podcast brought to you by Reed Smith's Insurance Recovery Lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist. Amy: Welcome to Insured Success and our Data Center series. My name is Amy Koss. I'm an Insurance Recovery associate attorney in Reed Smith's Philadelphia office, and I'm joined today by Steve Raptis, an Insurance Recovery partner in our D.C. Office, and Anthony Crawford, an Insurance Recovery partner in our New York office. As part of the Insurance Recovery Group, we represent policyholders in complex insurance disputes and counsel corporate policyholders on coverage issues. In today's episode, we're going to discuss the unique risks that data center owners and operators should consider when purchasing their insurance coverage. Data centers have been popping up all over the place, and they're really being integrated into our way of life. For example, very recently, OpenAI launched its Stargate project, and as part of that project, OpenAI intends to invest over $500 billion in building and supporting AI infrastructure over the next four years. And these infrastructure efforts are only going to continue to increase as technological advancements like AI and the Internet of Things become enmeshed with the way that we live our lives and the way that we do business. And much like anything else, with big investment comes big risk. So we're going to talk today about what owners and operators of data centers should consider as they look to ensure their risks, especially those risks that are unique to data centers. Stephen, Anthony, how are we doing today? Stephen: Hi, Amy. Doing well. Thank you. Amy: Great. So as I mentioned, data centers carry a unique set of risks. What should data center owners look for when shopping for insurance and reviewing different policy options? Stephen: It's a great question, Amy, and I know from personal experience where I live in northern Virginia, data centers are everywhere, and every large piece of unused property seems to be in the process of being transformed into a data center. So it is just including what we hear in newspaper reports and trade press about this being an expanding industry. There's no doubt about it. Everywhere you look, there are more and more data centers coming up and AI is only going to increase that demand over time. And we know that the insurance industry is usually pretty good about coming up with specialized products once an industry hits a certain critical mass, they will start to produce specialized insurance products for that industry. And one might think that the data center industry is large enough now that it would have its own specialized insurance products. But in fact, we have not seen that. And we've talked to a number of insurance brokers to see if they might be aware of specialized products that are out in the marketplace. And they told us that they're not, at least not yet. So where that leaves data center owners and operators is that they need to take traditional off-the-shelf, for the most part, insurance policies and make those fit into their risk management portfolio in terms of how do we protect our assets, how do we protect our business. There aren't data center-specific policies. So they need to go out the marketplace and buy their traditional policies, but try to get those crafted as well as they can to their particular situation. And the good thing is that a lot of these policies that have traditionally been out there, including cyber policies, errors and omissions policies, those kind of policies are not written on a standard form, and so they tend to be more negotiable, whereas your property, general liability policies, those are written on standard industry forms and may be a little bit harder to negotiate, but even those can be changed in the endorsements. Amy: Thanks, Steve. So, in terms of some of the risks that these data centers are facing that are particular to data centers, what do some of those include? Stephen: The first kind of risk that may be the most prevalent risk is with respect to property, and that's the data center's physical operations. How does it protect its actual physical workings at a particular data center? And then there is sort of the more technical insurance, which would include errors and omissions coverage and cyber coverage, which is intended to protect largely against liability. But there is some first party coverage in the cyber as well that we'll talk about. And then finally, there's general liability coverage that covers property damage and bodily injury that might occur as a result of the data center's operations. Amy: So in terms of protecting the actual physical assets of the data center, what kinds of coverage are we talking about? What can data center owners and operators look for? Anthony: That's an excellent question. And, you know, the simple answer is starting out, the data center owners are going to look at their property policies. So, you know, these property insurance policies generally cover both the physical structure of the building as well as the assets inside of the building, which, you know, this is going to be something that is going to be significant and important to policyholders. Now, these policies traditionally cover loss due to physical damage from events such as, you know, it can be either sort of natural events such as earthquakes, some type of flooding, or it could be other man-made events such as fires. You know, also thinking about things such as water in truth. These property policies, as I said before, also look at sort of the assets inside, which is going to play into it hugely when we're talking about data centers, because you're talking about a lot of computer and electronic components that are going to be there. Data centers and the physical structure of the data center itself. We also, there is a component of property insurance that includes coverage for business interruption losses. And basically, this is where some type of physical loss has occurred at a business property, and there is an associated loss of business income because of that damage. So traditionally, you see where a fire burns down a factory or damages a factory, they're not able to produce the widgets that they do. They're able to get coverage for the lost income because they're not able to sell their widgets. They'll be looking at something similar here with data centers. Now, there are some unique components in terms of looking at property coverage for data centers because traditionally, these things, these policies cover sort of tangible assets. Well, one of the biggest components of a data center is that they have a lot of soft data that they're storing on the physical computer components within the structure. That data in and of itself, it may or may not be covered under the traditional policy. So policyholders may need to look to other policies or looking to look to get some type of endorsements added to their property policies in order to make sure that there are no gaps in the coverage because, you know, arguably one of the most important aspects of the data center is the data itself. There are some other considerations that we should look at, policyholders should look at when looking to insure their data centers. And that's concerns about a traditional extra coverage that's usually not sort of thought about or discussed heavily and negotiated in the underwriting process, and that's service interruption coverage. By their very nature, it's pretty clear that having uninterrupted access to electricity is pretty important to data centers. So policyholders need to look specifically at this coverage that's traditionally found in property policies and sort of work with the insurance company and the brokers to tailor that coverage so that it provides meaningful coverage for service interruption losses at the data center. And, you know, there can be different components of that. So, for example, some may provide coverage when there is a damage to the power supply or it may provide only coverage if there's sort of a power surge. But, you know, at the end of the day. This is something that policyholders will have to heavily scrutinize to make sure that they are not going to lose out on coverage if, for instance, there is some type of interruption with the service provided by the utility companies. Another thing that property holders need to take in consideration are sort of risk mitigation requirements that may be found in policies, specifically when talking about making sure that there's fire suppression systems and how that language is worded in the policies. Because traditionally, these policies require or may specify that there need to be sprinkler systems in place. But if you think about the nature of this risk with data centers. Having traditional water sprinkler systems in place may not necessarily be the best solution for data centers in that these fire suppression efforts may cause further damage using water. So policyholders should look to negotiate w
